Business columnists

David Gardner: Stable value fund a good option?

Stable value funds. The very name induces a glazed eye torpor that would take a couple of hot IPOs to break.

But for those who have the patience to get to the bottom of their 401(k) investment menu, stable value funds offer some key advantages that merit inclusion in your retirement plan.

When looking at your 401(k) plan options, your investor mind probably didn't register the humble stable value fund. We have the recent, eye popping returns of the U.S. stock market to thank for that.

Who cares about 2.5 percent interest when 20 percent equity returns were common last year? Clearly it's not a replacement for a stock fund, but stable value funds offer their own advantages.

Stable value funds are among the safest of your 401(k) investment options, provided your plan is one of the roughly half that offer it. I'm specifying your retirement plan because, for most, that's the only place you can find a stable value fund. They are generally not available with self-directed accounts such as IRAs.

Retirement plan investors historically have relied upon money market funds for safety. But with these funds yielding close to zero, the recent performance of stable value funds is impressive. Long-term performance of 4.5 percent over the last 15 years is even better.

Stable value funds invest in short and intermediate-term government and corporate bonds, guaranteed insurance contracts, CDs and asset-backed securities.

Plus many funds purchase insurance to keep its price stable in contrast to traditional bond funds. This distinction is important when we look at an economic environment when interest rates are expected to increase.

When you purchase individual bonds or bond funds, the value of your investment will decrease in value as interest rates increase. Longer-term bonds are at the highest risk of losing value.

For example, Vanguard's Long-Term Bond fund was down about 5 percent in two successive months last year with interest rate increases on the horizon. In contrast, stable value funds generally ticked along earning more than 2 percent last year.

Remember that you don't invest in stable value funds seeking long-term growth. They are never going to perform as well as a good equity fund over time.

But almost everyone should have a portion of their portfolio in interest-earning investments. They provide safety in times of financial distress as in 2008, and can supply mental steel when resisting the urge to liquidate your stocks in the midst of a bear market. It also offers a good source of funds when rebalancing your investment accounts after a market decline.

Retirement plan sponsors have been concerned about two situations that could threaten the performance of these funds: How would stable value funds perform in a time of financial calamity and would they navigate an increasing interest rate environment?

Now we have the benefit of living through 2008, when some of the very insurance companies that issue investments held by stable value funds needed to be bailed out by the government.

In spite of the financial worries, the average stable value fund returned 4.6 percent that year. Last year saw increasing interest rates to a moderate degree, and stable value funds continued their positive returns in contrast to most bond funds.

While investors should not confuse stable value funds for a CD or other FDIC-guaranteed asset, they can be an important part of your overall investment strategy when combined with equity investments.

One final caveat is that there are usually limits on how often you can transfer money in and out of stable value funds, so be mindful of these limitations before you invest.

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